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Currency market review 2021

USD

US Dollar or USD has depreciated by 10% in last one year. 

In present times US retail sales data has beaten high estimates. The initial reaction has seen the USD extend gains across the board to hit fresh session highs with US yields also rising. 

Going forward, this will undoubtfully raise questions as to whether $ 1.9 trillion of fiscal stimulus is needed. 

The 1.3 levels is the 10 year support and this was the same level that had come into play in early-September to turn around the USD sell-off that had started in March 2020. The resistance of USD is at 1.1 levels. 

Euro

Despite all of the bazooka in the news over the past few months, EUR/USD has built into a fairly consistent range between 1.1600 and 1.1900. The  Euro has appreciated by a 10% in the past year.

The pair ran into a big level of  resistance from 1.3250-1.3275. That resistance check led to a quick pullback, but so bulls have persisted to keep the short-term trend running higher. The support is at 1.1 levels. The strategy is long Euro and short USD in the next 1 year. 

GBP 

The British pound appreciated by 10% in a year to 2 year high of $ 1.40 level for the first time since April 2018, amid hopes that the UK could ease lockdowns sooner than expected due to the fast deployment of Covid-19 vaccines. There are already signs that the economy is improving: PMI survey showed Britain’s private sector output stabilized in February 2021 while inflation rose a little more than expected in January. Still, retail sales slumped 8.2% month-over-month in January 2021, the most since a record 18% fall in April and government borrowing was the highest for January since records began in 1993. The pound has also been supported this year by lessening expectations of negative interest rates and a post-Brexit trade deal with the EU.

The GBP has been  bearish for a while now  because of a strengthening USD as the markets focus on rising US Treasury yields.

For now, the principal driver seems to be rising yields on US Treasury bonds and notes as the rollout of coronavirus vaccines leads to hopes that the US economy is on the way to recovery, potentially leading to rising US inflation.

The GBP gets support at 1.2 levels and resistance at 1.6 levels. The strategy is long GBP and short USD in the next 1 year. 

Rupee 

The Rupee had remained flat in past 1 year with 0% returns.

In July 2020 , the sovereign currency ratings on rupee had been cut to a lower grade after several years. The recession and Covid crisis are giving jitters to the amarkets each day.

Growth fundamentals of India were weakening since 2017 after recording medium rates in the H1 of the last decade.  Also though markets were bullish on India, during 2010 -2016 growth figures eluded the record rates of the previous decade.

Interest rates differential between India and US declined in H1 2010 decade which caused Rupee to depreciate. In 2012 interest rates in US were declining from 3.5% in 2010 which continued till 2014 and post 2015 the rates started rising again. Indian benchmark 10 year gsec yield was 9% in 2012, declined to 7.5% in 2014 and climbed to 9% again in 2015. In 2016 the yield  dropped to 6.2% and spiked to 8.5% in 2018 and then plummeted to 6.2% in 2020. The Fed started raising rates since 2018 when globally growth parameters had began improving since 2016.

In 2012, risk aversion was seen in Europe, Dow Jones was rallying  while CAC was stagnant. So Dollar appreciation was seen and Euro, Pound, Yen and Rupee depreciated.

Since 2014 risk appetite started improving. Green shoots in global economies were seen. The monetary easing and fiscal stimulus had yielded results.  The Dollar which appreciated as a result of all this between 2009 and 2015 led to a steep rupee depreciation during this era to the tune of about 75% from 40 to 70 levels.

During 2016-2020 rupee had depreciated from 70 to 75 levels on lower growth fundamentals and worsening of global economies again since 2019. The flight to Dollar as safe haven was seen in 2019 and caused the Dollar index to rise.o6

Another factor causing downward movements in rupee was the forward premia rates of Dollar rupee. The forward premia rose from 2.6 levels in 2007 to 3.9 levels in 2012 before declining to 2.9 levels in the later half of the past decade. The rupee too followed similar trend. 

In the next 2 years rupee is going to depreciate to 80 -82 levels on Dollar appreciation, benign macro data and recession, Covid crisis, higher forward premia rates and declining interest rates. Also if inflation rises on supply demand imbalances, the $ 3 trillion economy will see further depreciation of the domestic currency, thanks to Purchasing Power Parity theory. 

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Disclaimer

Views expressed above are the author’s own.



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